The Day Ahead: How to Read the Macy's Report

As I noted Wednesday, the second-quarter figures and earnings call from Macy's (M) was the real report of the month to study and analyze. With the back-to-school shopping season in full swing, and the holidays around the bend, the report and comments from Macy's shed light on how Middle America is spending -- or, in the case of Macy's, how consumers are not spending. Although the company tried to put lipstick on a pig on the earnings call, make no mistake: It was the second straight quarter of disappointment for this best-in-class operator.

I'm a little less concerned about Gap (GPS), however, following its guidance raise last week. Apparently, unlike Macy's, it has ordered the right amount of inventory, and its Old Navy chain is hot.

I would, however, tread lightly on Abercrombie & Fitch (ANF). Yes, the stock got two upgrades prior to earnings, and normally that is a bullish sign -- I have long viewed this as analysts receiving crucial information from supply chain sources or sources at the company. (Hey, this stuff happens. It has happened to me. Shh, don't tell anyone!) But, when it comes to Abercrombie, I have reservations that the company has not cut expenses quickly enough to counteract pressured merchandise margins.

I am going to lump American Eagle Outfitters (AEO) in the list of concerns, as well. I'm not too keen on the message the company sent in refusing to do a fun interview with me on camera. In the game of stock analysis, all things must be analyzed -- even someone saying "no" to an interview days before earnings.

Returning to Macy's, here are a few things that caught my attention on the earnings call. Of major note was that Karen Hoguet, the chief financial officer, commented that activewear was "on fire." I believe this constitutes yet another sign that Lululemon (LULU) -- due to report Sept. 11 -- likely had a poor second quarter. Obviously, these comments are bullish for Nike (NKE) and Under Armour (UA), and somewhat bearish on Foot Locker (FL), which is scheduled to report next Friday. I am hearing that the Jordan brand continues to be very strong at Foot Locker.

This is also rather related: U.S. retail-sales numbers should not be disregarded, as many pundits suggested on Wednesday. The numbers confirm what we heard from Macy's yesterday, and from Target (TGT) and Wal-Mart last month. Here are a few key quotes from the Macy's call:

"We weren't able to make up the sales shortfall from the first quarter."

"We were particularly pleased with the continued strength in the center core categories, especially handbags, the good performance of our back-to-school businesses, including junior, Impulse, Active and kids and the rebound in our Furniture and Mattress business after a tough first quarter."

"The weaker categories in the second quarter included both, women's and men's sportswear as well as non-athletic shoes."

"Our outlook for the fall season reflects our confident optimism tempered with the reality that many customers still are feeling the impact of an economic environment that at best is improving very gradually Macy's and Bloomingdales are doing what it takes to win with the customer."

"The end of the second quarter back-to-school was extremely strong at the start."

This should also be of interest: Macy's shares did not react favorably to positive back-to-school comments. That tells me the market is prepared to trade retailers on fundamentals. That, in turn, could lead to a bunch of ugly, ugly sessions for those names performing below their internal planning and external forecasting.

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